Stock market may be peaking but economy is still unstable

For a government hit by a toxic mix of rising prices, sliding economic growth and sagging political stock, the latest rally in equity markets should give an occasion to rejoice in these strained times. Backed by a sudden flood of investment from overseas funds which are seeking out global islands that fetch immediate healthy returns, India’s stock markets are eyeing a fairytale all-time high in 2013. The Sensex is fast closing in on the all-time intra-day high of 21,206.77 points it had scaled on January 10, 2008. The Sensex had hit an earlier all-time closing high of 21004.96 on November 5, 2010, which was then powered by a cracker of a debut by public sector Coal India Ltd on listing after the country’s largest initial public offer. Exactly three years hence, Indian stocks are again set to first reclaim, and possibly, canter past the peak they had run up a couple of years ago.

The real economy’s recent record, however, has been anything but spectacular. Industrial output crawled at 0.6% in August; capital goods output growth — a proxy for measuring investment activity — has slumped back into the contraction zone; consumer durables output continues to remain rooted in negative territory despite higher car production, possibly due to a sharper slowdown in the production of goods such as televisions and refrigerators. Besides, according to the Purchasing Managers’ Index of HSBC, a metric to measure industrial activity capturing output to sales, factory activity in India probably contracted for the second consecutive month in September. The food price index rose 18.40% in September, higher than 18.18% in the previous month. There are, however, some scattered signs of recovery. India’s exports recorded its third successive month of expansion growing by 11.15% in September while imports fell 18.10% during the month.

So what are the stock markets celebrating? In normal circumstances, it is safe to assume that a soaring equity market would imply that the economy is doing well, However, as the macro numbers show, domestic demand remains sluggish and the bottoming out process can be a long one. In these choppy conditions, retail investors should tread, or rather trade, with caution.